Three reasons to bet on Cellnex's stock market revival

Much has happened since Cellnex was the star stock on the Spanish stock market, and the telecommunications group continues to fail to recover. Despite multiple attempts, the company currently led by Marco Patuano remains more than 45% below the all-time high it reached in the summer of 2021, when its valuation of more than €40 billion allowed it to compete with the Ibex giants, surpassing in market capitalization historical groups such as BBVA, Telefónica, CaixaBank, Naturgy, and Endesa.

The decline that began then, initially understood as a correction of previous excesses, has ended up revealing a loss of faith that has proved to be much more than temporary, preventing the telecommunications tower manager from regaining investor favor, despite the many moves it has tried since then, ranging from a change in management to the cancellation of its accelerated growth strategy ( replaced by a divestment process ) to reduce debt, not to mention the promise of dividends.

All in all, Cellnex remains among the least bullish groups in what has been a year of solid gains on the Ibex 35 and, what's worse, continues to trade at a significant discount to its rivals, demonstrating that its problems go beyond a mere loss of appetite for the sector.

Despite everything, Marco Patuano's company continues to enjoy the support of a large number of analyst firms , who consider its medium- and long-term growth strategy one of the most attractive in the Spanish market. In fact, the group has nearly 80% buy recommendations (compared to only 6% sell recommendations), and its average target price presents a potential upside of 33% , the fifth highest in the Ibex 35.

Among these firms optimistic about Cellnex's stock market future is UBS, which issued a report on Thursday raising its target price for the company to €43.50, anticipating a turning point that could mark the beginning of the Spanish group's resurrection on the stock market. "We believe Cellnex currently presents an attractive opportunity for investors , as it has entered a period in which the main reasons for its discount compared to its competitors (15-40% on EV/EBITDAaL) are dissipating," suggest the Swiss bank's experts.

In this regard, UBS identifies three reasons for the increased investor suspicion toward Cellnex: high leverage, low free cash flow (FCF), and a lack of returns for shareholders.

Outstanding debt

In this report, analysts believe that the key factor influencing Cellnex's performance in recent years has been its debt-to-EBITDA ratio, which has led to an excessive correlation with bond performance (measured using the 10-year US bond) and has led to its share price falling "approximately 55% below the expected result according to the equilibrium model."

Given this, UBS points out that the deleveraging process is key to enabling the revival of its stock price. "Deleveraging, along with substantial growth in both free cash flow (FCF) and shareholder returns, should drive a revaluation from now on," UBS believes.

Regarding the first of these points, they highlight that the sale of the Swiss business and data centers could contribute to a 0.3x reduction in their debt-to-EBITDA ratio, which currently stands at 6.1x (from 7.6x). Furthermore, they estimate an organic reduction of 0.2x per year, despite assuming annual dividends of between €1.2 billion and €2.2 billion in the 2027-2030 period. With all this, they believe the group could reach its target of 5.5x as early as 2026.

The Swiss bank believes Cellnex's FCF will reach nearly 2 billion euros by 2030.

Regarding FCF weakness, the bank's analysts are convinced that, as the BTS (build-to-suit) programs are completed in the medium term, combined with growing revenue, free cash flow will grow significantly, potentially reaching between €1 billion and €1.2 billion in 2027 and approaching €2 billion in 2030. "Cellnex's FCF growth profile is remarkably solid and broadly guaranteed, so we believe it should be one of the main attractions for investors," they observe.

Third, UBS focuses on Cellnex's shareholder remuneration policy, which has been conspicuous by its absence until recently, precisely due to high debt and weak cash flows. Now, however, the group has launched a share buyback program worth €800 million (already executed) and has committed to paying a dividend of at least €500 million next year. "We believe that, as leverage decreases, shareholder remuneration will likely become a determining factor in Cellnex's valuation," argues UBS.

In addition to these issues, the Swiss bank also believes that investor sentiment toward Cellnex has been penalized recently by concerns about a possible new wave of concentration among telecommunications operators in the European Union, with the resulting loss of customers.

Risk of consolidation

On this issue, they note that "while mobile operator mergers typically generate network synergies, including the cancellation of up to approximately 30% of the overlying mobile infrastructure, there are a number of mitigating factors that, in our view, significantly reduce the risk of revenue loss for Cellnex ." These include "contractual obligations under anchor leases, limited revenue from non-anchor leases, overall underinvestment in mobile networks in Cellnex's key markets, the sub-scale nature of most of the parties seeking to merge, and a potentially novel approach to merger remedies by the EC, which could focus on 5G investment commitments."

From all this, they conclude that, "in secondary leases, we estimate the risk at a maximum of approximately 3% of Cellnex's revenue and approximately 8% of Cellnex's free cash flow (FCF) by 2027," while "income from anchor leases is well protected and their structure would be subject to renegotiation."